Wednesday, December 3, 2008

The Thomas Friedman Top

It's easy for us to pick apart recent history and say all the information was there; tight credit spreads, an LBO buyout binge, a housing bubble, a commodities bubble, Goldman Sachs and Thomas L. Friedman.

Yes, Thomas L. Friedman.

From Wikipedia:

"In the book, Friedman recounts a journey to Bangalore, India, when he realized globalization has changed core economic concepts. He suggests the world is "flat" in the sense that globalization has leveled the competitive playing fields between industrial and emerging market countries."

Could there be a more appropriate illustration of Friedman's captive audience or should we say the choir of advertising executives posing as free-market capitalist?

The World is Flat by Thomas Friedman Wins Financial Times and Goldman Sachs Business Book of the Year AwardNovember 22, 2005

Lionel Barber, editor, Financial Times said: 'We've had a wonderful set of entries for this prestigious prize. Thomas Friedman is a worthy winner. His book is compelling, hugely enjoyable and relevant to the most pressing issue on the minds of politicians and business people around the world.'

'Thomas Friedman has identified the most important economic and political theme of the early 21st century and has provided us with the vocabulary for debating its merits and challenges.'

Speaking from Washington DC, Thomas Friedman commented:

'I'm absolutely thrilled and honoured to be the first recipient of the Financial Times-Goldman Sachs business book award. I'm thrilled and honoured because these are two such classy organizations, who take business and business reporting seriously. I'm thrilled and honoured because the judges who made this award are such an esteemed group. And I'm thrilled and honoured because I think this Financial Times -Goldman Sachs award for business-financial writing is going to become a much sought-after prize, as more and more writers and publishers get to know about it in coming years. I'm sorry that my crazy travel schedule - I've been between Beijing and Jerusalem in the past few weeks - did not allow me to be in London.'http://www2.goldmansachs.com/our-firm/press/press-releases/archived/2005/2005-11-22.html

Where have I heard such confidence and illuminating insight before? Perhaps Alan Greenspan, circa 2004?

"Overall, the household sector seems to be in good shape," "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home." http://www.istockanalyst.com/article/viewarticle+articleid_881962.html

It appears Friedman was as prescient to the strengths of globalization as Greenspan was to housing or more or less everything.Fast forward a few years and here we are. The chart to the left illustrates just how bubblicious the concept of globalization became. From the ever worthy fellows at the Bespoke Investment Group:

"Just as it’s been a Black October for the equity markets, it’s been even worse for global commerce. The Baltic Dry Index, which is often cited as a barometer for global shipping rates, is now down fourteen days in a row and has declined on all but one day in October, with a month to date fall of 64.3%. Since its peak reading of 11,793 in May, the index is now down by 90.3%.

As shown, the Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the ‘globalization’ trade. Many argued that globalization would work its way into every aspect of the economy, with some health care companies in the US even going so far as to send their patients to emerging countries for surgical procedures. Judging by the recent performance of the Baltic Dry Index as well as global currency markets, however, it now appears that like any ‘new thing,’ the globalization trade went too far. In fact, when compared to the bursting of prior bubbles, the decline in the Baltic Dry Index from its peak is greater than every single one." http://bespokeinvest.typepad.com/BespokeBiggestBubble.pdf

One last excerpt from the book quoting Bill Gates. I can't dispute the man's genius, but I think he may have gotten a bit carried away here. Kind of like when he was CEO for a bit too long.

"Bill Gates explains the meaning of this transformation best. Thirty years ago, he tells Friedman, if you had to choose between being born a genius in Mumbai or Shanghai and an average person in Poughkeepsie, you would have chosen Poughkeepsie because your chances of living a prosperous and fulfilled life were much greater there. ''Now,'' Gates says, ''I would rather be a genius born in China than an average guy born in Poughkeepsie.'' - The World Is Flat

I'm not sure the people in Mumbai or Shanghai will feel the same way in the next decade. Just like the markets, they revert to the mean.

Investman C&F

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